New York Estate Planning Lawyer Blog

by Michael Ettinger, Esq.

Recently, a couple came in to see me. They were people of means, having accumulated an estate in excess of two million dollars. Sadly, the husband, a fine gentleman, had contracted an incurable form of cancer. They knew it was time for a review of their estate planning documents.

The couple had two sons, both in their fifties. One was an established professional, the other a successful entrepreneur.

The client produced their current will, written nine years earlier. Since their estate was over one million dollars, the will contained a "credit-shelter" or "bypass" trust. This means that, upon the death of the first spouse, the deceased spouse's assets would be held in a trust for the surviving spouse. This technique allows the surviving spouse to have the use and enjoyment of those assets without having them includable in her estate. On her death, husband's assets pass to the children, thus taking advantage of his one million dollar exemption.

I read the trust. The I read it again. I could not believe what I was reading. The will set up the credit shelter trust for the wife, with the Bank as trustee. This technique is sometimes used by attorneys to ingratiate themselves with the Bank. It is often not in the best interests of the client, since one or both of the sons could have been chosen as trustee thus saving the Bank's fees of approximately 1% of the trust annually, plus other fees as will be shown below.

But that was not the unusual part. The will also set up trusts for the sons, with the Bank as trustees FOR THEIR LIFETIMES, giving the Bank the following authority:

"The Trustee is granted the further absolute discretion to determine when, how, and whether to make any distribution of principal, the amount to be distributed, the specific purpose for making any distribution, and whether any distribution is advisable."

The Bank was also given authority to collect its fees as trustee "without offset or reduction for any other fees or other compensation paid to it or any other "affiliated entity" including fees or other compensation paid by any mutual fund or other investment vehicle agent. "Such compensation may be made without court approval." This means that the Bank, in control of the assets, would also collect fees as the investment advisor, effectively a "double-dip" and specifically excludes court scrutiny of the arrangement. There was no provision to change the trustee.

So, what happened under the trusts for the sons when they died. The assets were then put into trusts for the grandchildren with the Bank as trustee all over again! The Bank was also given control of the assets over the grandchildren's lifetimes with the following "suggestion":

"The Trustee may consider distributing: one fifth (1/5) of the trust estate upon the grandchild's attaining the age of thirty (30) years; three-eighths (3/8) of the trust estate upon attaining the age of thirty-five (35) years; and the balance of the trust estate upon the grandchild's attaining the age of forty (40) years. Nothing set forth herein shall be construed as providing a grandchild with the authority to require any distribution to be made from the trust at such ages" (emphasis added).

The client was appalled. They had no idea whatsoever these draconian provisions were in their documents. In our experience, most people do not know or understand what is in their estate planning documents.

Given the circumstances of the husband's health, within the week we had replaced all of the documents with trusts controlled by the family alone, much to their relief. There was a great deal of satisfaction on their part knowing that had the husband died without having the plan reviewed, they would have been stuck with the Bank, irrevocably, forever. All's well that ends well.

by Michael Ettinger, Esq.

Previously we wrote about the lawyer as co-trustee in the second marriage setting. The main concern there was to protect the share and the interests of the deceased spouse and their family. This was a situation ideally suited for the lawyer as trustee due to inadequate protection if one of the surviving spouse's children acts as co-trustee, and the inevitable conflict that arises if one of the deceased spouse's children acts as co-trustee.

For singles and couples without children, the lawyer as co-trustee fulfills an entirely different function. In the couples setting, we are really referring to the issues that arise after the first spouse dies. From an estate planning point of view, couples without children ultimately have the same issues as singles.

So whether you are single now or eventually become one your key issue is not planning for death, not who you are leaving it to and certainly not having a will. Your key issue is planning for disability. Should you be unable, at some point, to handle your financial and legal affairs due to accident or illness, who will take over? If you don't have a strong plan for disability, which they say eventually happens to about half of all people, you are at considerable risk of having the wrong person or a stranger take over your affairs. In the event of disability, virtually anyone (hospital, doctor, lawyer, social worker, neighbor, relative, friend, etc.) may commence a proceeding to have a legal guardian appointed for you. Once you enter into this bureaucratic process, usually involuntarily, it is exceedingly difficult to extricate yourself and you lose precious control over your affairs. We often say you are only as strong as your back-up plan. If you have set up a living trust, you are in charge now, but the trust says who takes over in the event of disability. You get the person or persons you have chosen, not a court appointed legal guardian, along with the many thousands of dollars in costs that such proceedings entail.

So, who should you choose? Our advice is to choose two people. One a friend or relative who is willing to undertake the responsibility and then the lawyer as co-trustee. The lawyer will see to it that the trust is run properly and that all of your affairs are handled according to law. It takes a considerable amount of the anxiety, pressure and responsibility off of your friend or relative who has so kindly agreed to undertake this task. Further, you have two people signing off on all decisions, and everyone knows what two heads are better than. Not only is the possibility of a mistake being made greatly reduced, but it also eliminates the risk of misappropriation of assets. In some cases, where clients do not have a friend or relative available for this purpose or where they do not want to burden anyone with the responsibility, the lawyer may act as sole trustee.

New York trustee's fees, which only take effect when the trustee is called upon to act, are 1.05% of the first $400,000, .45% of the next $200,000 and .3% of any amounts over $600,000. So, for example, on a one million dollar trust, the trustee's commission would be $6,300.00 per year.

Perhaps the greatest insight your writer has gained in over thirty years of practicing law, is that planning for disability is more important than planning for death. The lawyer as co-trustee may be an invaluable asset to the childless person in the event of disability.